How a medical practice is valued.

What are the ways to value a medical practice?

Appraisers and advisers use three approaches, often side by side. The market approach looks at what similar practices sold for and applies the same yardstick, usually a multiple of earnings. The income approach projects the practice's future cash flow and discounts it to what that stream is worth today. The asset approach adds up what the practice owns, equipment, receivables and sometimes intangibles, and subtracts what it owes.

Which one carries the weight depends on the practice and the buyer. A profitable group sold to a private equity platform or health system is usually priced by the market approach. A small practice with thin earnings, or one closing rather than selling, may be worth little more than its assets, because a buyer cannot count on the patients staying once the physician leaves.

What earnings does a buyer actually value?

Buyers value normalized earnings, not the figure on the tax return. Owner physicians often pay themselves in ways that blur profit: above-market salaries, family members on payroll, rent paid to a building they own, personal expenses run through the practice. An adviser adjusts each of these to what an arm's-length owner would pay, and the result, usually called adjusted EBITDA (earnings before interest, taxes, depreciation and amortization), is the number the multiple is applied to.

The adjustment that matters most is the physicians' own pay. After a sale the physicians usually stay on as employees, and their new compensation comes out of the earnings the buyer is paying for. A higher salary after closing means lower earnings, and a lower price; the two are negotiated together.

What are revenue and earnings multiples?

A multiple is a shortcut: the price divided by a measure of the business. An earnings multiple divides price by adjusted EBITDA and is the common yardstick for practices with real profit. A revenue multiple divides price by collections, which ignores how much of each dollar the practice keeps, and is used mostly for small practices or rough comparisons. Small practices are sometimes priced on the owner's total benefit instead, which counts the owner's own pay as part of the earnings, and that multiple is not comparable with an EBITDA multiple.

FOCUS Investment Banking, a firm that advises on practice sales, publishes a typical range of 5 to 9 times EBITDA (published range, FOCUS Investment Banking, read October 25, 2026) for small and mid-sized physician groups and 10 to 12 times EBITDA (published range, FOCUS Investment Banking, read October 25, 2026) for very large organizations. That is one adviser's published range for the deals it sees, not a market average, and a practice's own figure depends on everything in the next section.

What moves a practice's value up or down?

Scale and durability move value most. A group with several physicians, more than one location and earnings that do not depend on one person is worth a higher multiple than a solo practice whose patients follow the founder. Payer mix matters: commercial and cash revenue is valued above revenue that depends on government rates. Owned ancillaries, such as imaging, a lab or a surgery center, add margin and are valued highly. Clean, consistent financial records make earnings believable, and a buyer pays less for earnings it has to take on faith.

Risks pull value down: a retiring physician who produces much of the revenue, pending payer audits, compliance problems, an expiring lease or key staff likely to leave.

Questions to ask

• What share of collections does the selling physician personally produce?
• What will the physicians earn after the sale, and how does that change the earnings being valued?
• Are the last few years of financial statements consistent and reviewed by an accountant?
• Which adjustments to earnings is the adviser proposing, and could a buyer's diligence support each one?
• Is the valuation on adjusted EBITDA, revenue or the owner's total benefit?

Which rules shape a practice sale?

A practice sale is a transaction among people who may refer patients to each other afterward, which brings the federal referral rules into the price itself. The patient records that transfer with the practice are governed by the privacy rules. Both need health care counsel, not just a business broker. The selling a medical practice guide covers the steps of a sale.